Blockchain is a distributed electronic ledger that records transactions between source address (es) and destination address (es) and may be implemented in various fields. Blockchain is representative of a data structure that stores a list of transactions. The transactions are bundled into blocks and every block except for the first block is linked to a prior block in the chain. A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks and the transactions contained in the corresponding block. One of the implementation of blockchain is in digital currency (bitcoin).
The integrity of the entire blockchain is maintained because each block refers to or includes a cryptographic hash value of the prior block. Accordingly, even a small modification to the data will affect the hash value of the entire block. Therefore, once a block refers to a prior block, it becomes difficult to modify or tamper with the data (e.g., the transactions) contained therein. Each additional block increases the difficulty of tampering with the contents of an earlier block. Thus, even though the contents of a blockchain may be available for all to see, they become practically immutable.
The addresses used for blockchain transactions are created through cryptography such as, for example, public key cryptography. For instance, a user may create a destination address based on a private key. The relationship between the private key and the destination address can later be used to provide “proof” that the user is associated with the output from that created transaction. In other words, the user can now create another transaction to “use” the contents of the prior transaction. Further, as the relationship between the destination address and the corresponding private key is only known by the user, the user has some amount of anonymity as they can create many different destination addresses (which are only linked through the private key). Accordingly, a user's total association with multiple transactions included in the blockchain may be hidden from other users. While the details of a transaction may be publically available on the distributed ledger, the underlying participants to those transactions may be hidden because the addresses are linked to private keys known only to the corresponding participants.
While blockchain technology has the potential to offer new benefits, it also poses problems for certain types of implementations. For instance, a decentralized and anonymous transaction ledger can be problematic for certain types of environments that desire or require transparency and/or auditability for the transactions. There are no names or personal information associated with a user during a transaction and therefore, it becomes difficult to fetch user-level statistics and link blockchain addresses (for e.g. Bitcoin addresses) to them. Furthermore, there may be multiple source and destination addresses for each transaction and multiple addresses may belong to a single user. Therefore, the feature of user anonymity makes it a lucrative target for anomalous activities such as money laundering and illegal activities such as terrorist activity financing offence. Further, this also accounts for the reluctance of large financial players to make blockchain a major part of their future. Due to the nature of financial services, detecting and preventing financial crime is becoming intricate.
Further, some of the existing techniques of identifying anomalous activities in a blockchain network, use cluster analysis, wherein the transactions are clustered based on one or more user attributes. In these techniques the transactions that vary from normal transactional behavior are identified based on user level data. However, for efficient and accurate detection of anomalous activities, it is observed that user level data as well as associated behavior with other users must be taken into account. Compliance professionals are thus looking for better and more cost-effective strategies.
In light of the above drawbacks, there is a need for a system and a method which effectively detects anomalous activities (user behavior, events and transactions) in a distributed and decentralised network which offers user anonymity, such as, a blockchain network. There is a need for a system and a method which uses a dynamic and proactive approach for monitoring anomalous activities, taking into consideration statistics of users individually as well as associated transaction behavior with other users on the blockchain network. Further, there is a need for a system and a method which is capable of analyzing transaction data extracted from a block chain network in real time and detect anomalous activities. Yet further, there is a need for a system and a method which can be easily implemented with existing distributed and decentralized networks such as public and private blockchain networks. Yet further, there is also a need for a system and a method which is cost effective and provides superior performance.